Dollar gains as trade talks between U.S. and China take focus

NEW YORK (Reuters) - The dollar rose on Friday as investors prepared for the outcome of trade talks between the United States and China at the G20 meeting on Saturday, which investors expect will increase volatility across markets.

U.S. dollar notes are seen in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration

U.S. President Donald Trump said on Friday there were some good signs ahead of the meeting with Chinese President Xi Jinping.

“We’re working very hard. If we could make a deal, that would be good. I think they want to. I think we’d like to. We’ll see,” he said.

Trade Representative Robert Lighthizer said on Friday he would be surprised if Saturday’s dinner between Trump and Jinping “wasn’t a success.”

“For now, really, the trade issue seems to be a dominant theme swaying sentiment,” said Mazen Issa, senior FX strategist at TD Securities in New York. “If you have any sort of news or headlines that is indicative of a positive or negative outcome, I think markets are going to react accordingly.”

Credit Suisse strategists expect the Chinese currency to weaken to a decade low of 7.20 per dollar by end-2019.

Data on Friday showed growth in China’s vast manufacturing sector stalled for the first time in over two years in November as new orders slowed, piling pressure on Beijing ahead of the trade talk.

Investors are also continuing to evaluate comments by Federal Reserve Chairman Jerome Powell on Wednesday that the U.S. central bank’s policy rate is now “just below” neutral, a level that neither brakes nor boosts a healthy U.S. economy.

The immediate reaction sent the dollar tumbling as investors saw the Fed as likely to end its rate-hiking cycle sooner than previously expected.

Interest rate futures traders are now pricing for only one rate hike in 2019, according to the CME Group’s FedWatch Tool, below Fed projections of three increases during the year.

Some analysts see the move as exaggerated, however, with the Fed more likely to let economic data guide it on when to pause tightening.

“There’s no denying that the Fed rhetoric has changed in recent weeks, but we don’t think it’s changed quite as much as the repricing in rates suggests it has,” said Adam Cole, chief currency strategist at RBC Capital Markets in London.

Additional reporting by Dhara Ranasinghe in London; editing by Jonathan Oatis and James Dalgleish